Regulation A currently permits issuers to conduct a limited-scale public offering and subjects issuers that use it to a lighter compliance burden as compared with larger public offerings. However, because of the costs of preparing an offering circular to be filed with the Securities and Exchange Commission (SEC) and the requirement to achieve clearance by the various state securities regulators, especially when compared with the limited amount that may be raised ($5 million), Regulation A has been infrequently used. For example, only one offering was conducted in 2011 under Regulation A. Section 401 of the Jumpstart Our Business Startups (JOBS) Act required the SEC to adopt rules under a new, larger, limited public offering section of the Securities Act of 1933 (the Securities Act) commonly referred to as “Regulation A+.” The Regulation A+ section of the Securities Act increases the offering cap to $50 million and permits sales to be exempted from the review of state securities regulators, but would require (at least) annual filings of audited financial statements.
On December 18, 2013, the SEC proposed rules that would rewrite existing Regulation A to include Regulation A+ requirements to increase the usefulness of its rules relating to smaller public offerings. This new Regulation A would be split into two tiers. Tier 1 would be similar in scope to current Regulation A and would permit sales up to $5 million in any 12 month period ($1.5 million of which may be resales by selling stockholders). Tier 2 would permit sales up to $50 million in any 12 month period ($15 million of which may be resales by selling stockholders). Offerings under $5 million could be conducted under either tier. As with current Regulation A, the sale of securities under either tier, as revised, would involve certain disclosure requirements as specified below, but offerings under Tier 2 would involve additional compliance requirements. Securities sold under Regulation A would not be “restricted securities” and, therefore, would not be subject to holding periods before resale.
Limitations. Regulation A would be limited to specified types of issuers and securities. The following issuers would be prohibited from using Regulation A: issuers organized outside of the United States or Canada, reporting companies under the Securities Exchange Act of 1934 (the Exchange Act), investment companies, issuers offering fractional oil and gas interests or similar mineral rights, companies subject to deregistration orders under the Exchange Act, issuers that have failed to file required filings under Regulation A in the two years prior to the offering and companies subject to a bad boy disqualification. Although not expressly mentioned in the text of the rules, private funds would also be excluded from relying on Regulation A because they are prohibited from making public offerings. Regulation A would also only be able to be used for offerings of equity securities, debt securities, convertible debt securities and guarantees thereof, but not for asset-backed issuances. Regulation A offerings would not be integrated with offerings pursuant to compensatory benefit plans under Rule 701, pursuant to Regulation S, made in reliance on the proposed crowdfunding rules or made more than six months after the completion of the Regulation A offering.
Offering Statements. Both tiers of offerings would require an offering statement to be filed with the SEC for review and comment. As with current Regulation A, an offering statement under proposed Regulation A would include an offering circular, which would include an abbreviated version of the disclosure provided in the prospectus in a registered public offering, along with other Regulation A-specific information.
The SEC review and comment process would, however, be modernized to correspond to the process for registered public offerings, including permitting the submission of draft offering statements for review by the staff and testing the waters solicitation materials. Offering statements would also be electronically filed, and the communications process relating to a Regulation A offering would be updated to match the SEC’s offering reform adopted in 2005. For Tier 2 offerings, the financial statements included in the offering circular would be required to be audited in accordance with generally accepted accounting principles in the United States or, if the issuer is Canadian, International Financial Reporting Standards, but the auditor would not be required to be registered with the Public Company Accounting Oversight Board.
Investing Limits. Investors in Tier 2 offerings would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth.
On-Going Reporting. Issuers who sell securities in a Tier 2 offering would be required to file reports with the SEC. Annual reports on new Form 1-K would update the information in the offering statement and would be required to be filed within 120 days after the end of the fiscal year. Semi-annual reports on Form 1-SA would include management discussion and analysis, financial statements and limited other information and would be required to be filed within 90 days after the end of the semi-annual period covered by the report. Current reports on Form 1-U would be similar to a Form 8-K filed by a public issuer, but would relate to a more limited number of trigger events. Those current reports would be required to be filed within four business days after most trigger events.
The duty to file reports would be suspended while an issuer that has sold securities under Regulation A becomes a public reporting company under the Exchange Act because it either has a class of securities registered under that act or it has sold securities pursuant to a registration statement. As with public companies, the obligation to file may also be suspended when the class of securities sold under Regulation A is held of record by fewer than 300 persons.
Preemption of State Securities Regulator Review. As proposed, purchasers of securities in a Tier 2 offering would be “qualified purchasers,” and, therefore, the Tier 2 offering would be exempt from the authority of state securities authorities under Section 18 of the Securities Act. State regulators have, however, argued that they should still be involved in the process out of anti-fraud concerns and that the securities regulators could create a coordinated review system. The SEC is considering their views and has asked for public comment.
